Monthly Archives: September 2016

There is a lot written about the tension between the sales department and the credit department. Of course sales wants to close the deal only to have credit question the validity of the customer.

I have stressed this over and over here in the blog – the company is the lender. And the company should treat credit the same way a lender does – with due diligence. What makes a company think that extending $50K of credit to a customer who couldn’t qualify for $5K of credit from a bank is going to turn out ok? Generally small businesses use the “gut check” method of deciding when to offer credit terms.

Better sales divisions train sales people to come to the credit department early in the sales cycle to have the customer pre-qualified for an impending sale. This way there isn’t a lot of time wasted on a deal that has no chance of closing. A business banker is doing the same thing when considering a potential loan.

One of the benefits of using a factoring company like ours is the ability to have a potential customer’s credit checked anytime as part of the approval process. We use multiple sophisticated credit vendors to cross check the credit availability of any account debtor (customer.) This becomes an ongoing resource built into the invoice funding process. A reminder that factoring is more than the money.

Since the structure of a factoring transaction is the purchase of accounts or invoices and not a loan to the company, the payment that ultimately retires the advance is made directly to the factor.

Let’s break it down. When a company provides a good or service to a customer and offers payment terms, like 30 days, the company is essentially lending money to its customer. The loan, in the form of an invoice is due and owing and payment is expected for accepted service.
The company can then seek a factoring company to facilitate early payment of the invoice by assigning the proceeds. The factor upon determining the customer is creditworthy and the goods accepted – in other words the loan from the factoring client to the customer is good, makes an advance to the client based on the value of the invoice.

How does the factoring company get repaid? When making the advance on the invoice, the factoring company along with the client reach out to the customer to notify them the proceeds of the account have been assigned to the factor. The notification includes direction that the payment of the invoice should be made directly to the factoring company. Since the client accepts the advance and assigns the proceeds of an invoice, the ownership of that invoice is legally transferred to the factor. The factoring company reserves rights attributed to the payment.

It is important to recognize this is normal course of business for payments from accounts receivable financing to be made to the lenders lockbox. Payments cannot be made to a shared bank account or to the client and then the client forwards the payment back to the factor. But payments can be made in care of the client but remitted to the factoring company’s address. This allows the customer to retain the vendor card in their accounting system and only need to change the remit to address.

Be sure when contacting a factoring company make sure the accounts are available. In order to factor invoices your accounts receivable must be free of any liens. This might include judgments, state or local outstanding taxes, outstanding loans, investors or partners. Any of these examples might shield your obligation to them by securing their legal security position.

The difference between a secured party and a general vendor is important should there ever be any sort of liquidation event. The secured party gets paid in full from the company assets and the general parties have to divvy up what is left. Obviously any lender will want to make sure their loans get repaid under any circumstances.

Position of security is critical. This is handled through UCC-1 filings with your State agency. If there are no filings at all, the first lender to make a loan will be in first position. Any subsequent lender will see another entity in first position, so normally the outstanding loan is paid off and the first lender will release their security position by filing the UCC-3 termination releasing the collateral including the accounts.

Typically a company that has been around for a while has a clutter of old filings that need to get cleared out. If the old filing is with a bank that is now been bought out or merged it can add unnecessary time to the approval process. So a word to small businesses – when you pay off a loan and discontinue the relationship with a lender insure they terminate their security position as part of the payoff.

To help understand how factoring companies talk about different parties to a factoring transaction, if you contact us seeking accounts receivable financing, you will be considered the “client.” Throughout the relationship the borrower is the “client.”

So if you are the client then you have “customers” who you provide services or products to and then invoice. Factors make advances on invoices to our client’s customers. Customers are also known technically as “account debtors.” The credit worthiness of the customer/account debtor will be the condition upon which advances are considered.

Here is what you need to do in order to start a factoring relationship;

Bookkeeping: You should have an accounting package installed and up to date. The ability to provide financial statements, aging reports and customer payments histories is helpful.

Customer Credit Limit: What methods are you currently using to determine how much credit you will extend to a particular customer account? This is one of the benefits of factoring as we will start providing robust reporting on customer creditworthiness.

Industry: Match your industry with a factoring company that is experienced working with clients in that industry. There are a handful of specialized verticals like medical, trucking & construction.

Business Model: What is a job? Do you use purchase orders? Is shipping involved? Do you invoice before the work is completed? Task orders? Progress payments? License agreements? Annual contracts? Any of these can affect the funding opportunity.

Existing loans: If your company has a loan with a bank and is now looking for additional capital this could be a problem. The bank is probably using your business assets as collateral, meaning the accounts receivable. In order to get past this impediment either the loan must be paid off or the bank agrees to subordinate their position. This could be difficult.

Application: Relatively speaking applying for factoring is not as daunting as a conventional loan. It is much faster and requires less paperwork. Some of the documents related to the application are;

The completed application

Current balance sheet

Current income statement

Current receivables aging report

Current payables aging report

Customer list for credit approvals

Flexibility, reliability, and dedication are the main ingredients to pursue when considering a source for your financing. Look no further than the steady growth and dependable service CCA provides all our clients. Click here to learn more.